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Genesis Energy, L.P. (GEL)

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Genesis Energy, L.P. (GEL)

Q3 2016 Earnings Conference Call

November 3, 2016 10:00 PM ET

Executives

Grant Sims - Chief Executive Officer

Robert Deere - Chief Financial Officer

Analysts

Eric Genco - Citigroup

John Edwards - Credit Suisse

Charles Marshall - Capital One

TJ Schultz - RBC Capital Markets

Ethan Bellamy - Robert W. Baird & Co.

Presentation

Operator

Welcome to the 2016 Third Quarter Conference Call for Genesis Energy. Genesis has five business segments. The Offshore Pipeline Transportation Division is engaged in providing the critical infrastructure to move oil produced from the long-lived, world-class reservoirs in the deepwater Gulf of Mexico to onshore refining centers.

The Onshore Pipeline Transportation Division is principally engaged in the pipeline transportation of crude oil. The Refinery Services Division primarily processes sour gas streams to remove sulfur at refining operations. The Marine Transportation Division is engaged in the maritime transportation of primarily refined petroleum products. The Supply and Logistics Division is engaged in the transportation, handling, blending, storage and supply of energy products, including crude oil and refined products. Genesis’ operations are primarily located in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming and the Gulf of Mexico.

During this conference call, management may be making forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The law provides safe harbor protection to encourage companies to provide forward-looking information. Genesis intends to avail itself of those Safe Harbor provisions and directs you to its most recently filed and future filings with the Securities Exchange Commission. We also encourage you to visit our website at genesisenergy.com, where a copy of the press release we issued today is located. The press release also provides a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures.

At this time, I would like to introduce Grant Sims, CEO of Genesis Energy, L.P. Mr. Sims will be joined by Bob Deere, Chief Financial Officer; and Karen Pape, Chief Accounting Officer.

Grant Sims

Good morning and welcome to everyone. Given the continuing challenging operating environment in the energy midstream space, we are very pleased with the financial performance of our diversified, yet increasingly integrated, businesses. Relative to the year earlier period, for EBITDA to be up some 4% in the aggregate, in the face of such headwinds, demonstrates the resiliency of our assets and especially our people.

Before Bob goes into our typical detail about this past quarter, I thought it might be useful to simplistically review what those headwinds we mention have meant to us in terms of financial performance relative to historic periods.

In round terms, our Onshore Pipeline segment is down about $5 million a quarter, in large part due to volume cannibalization and margin compression. Our Supply and Logistics segment has suffered around $5 million a quarter, again due to volume cannibalization and margin compression. Finally, our Marine segment is off almost $10 million a quarter, and you guessed it, primarily due to volume cannibalization and margin compression.

Volume cannibalization and margin compression are symptomatic of excess capacity. Excess capacity is not necessarily resolved overnight or by underlying commodity prices rebounding $10 or $20 a barrel. It takes time and having the assets and services that people want even in difficult operating conditions is not a bad place to be.

For example, as we stated in the release, less than 5% of our total gross margin in the quarter was derived from minimum volume commitments or take-or-pay type agreements. To us, that’s a good thing. It has nothing to do with fixed fee versus commodity sensitive fees or otherwise. It simply means, our customers by and large actually need, value and use our assets and services, even in what many have called an historic down cycle in the energy space.

If people mean, when they talk about things in the midstream space getting better in late 2017 or 2018, that activities are going to return to 2014 or early 2015 type conditions, then we’ll benefit from that and do even relatively better. However, we’ve tried very hard to position the partnership to do reasonably well even if things don’t get better.

That’s not to say it’s impossible for us to take additional marginal steps backwards. However, we are close to beginning to realize the incremental contributions from a number of organic initiatives starting this quarter and accelerating through 2017, which should hopefully more than offset incremental challenges if and when they might arise.

With that, I’ll turn it over to Bob to discuss this standalone quarter’s results in more detail.

Robert Deere

Thank you, Grant. In the third quarter of 2016, we generated total available cash before reserves of $95 million, representing a decrease of $1.3 million, or 1%, over the third quarter of 2015. Adjusted EBITDA increased $4.9 million over the prior year quarter to $131.8 million, representing 4% year-over-year growth.

Net income attributable to Genesis for the quarter was $32.7 million, or $0.28 per unit, compared to $363.2 million, or $3.38 per unit for the same period in 2015. The third quarter of 2015 included a one-time non-cash gain of $335.3 million, resulting from a step up in basis to fair value of our historical interest as result of certain interest acquired in the acquisition of the offshore pipeline and services business of Enterprise.

Exclusive of that gain, net income attributable to Genesis would have been $27.9 million for the third quarter of 2015, representing a comparative increase in 2016 of $4.2 million or 15%.

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